Taxation and financial performance of SMEs in Uganda

Abstract

Empirical evidence has shown that taxation may impede SME growth through its transmission effects on the financial performance in developed and developing countries. However, little is known about the impact of taxation on the financial performance of SMEs in LICs like Uganda. This study attempts to fill this gap in the literature using data from the World Bank Enterprise Survey of 762 SMEs in Uganda. The study examines the effect of the tax burden on SME growth in Uganda. Three specific objectives were addressed in this research, that is; a) to examine the effect of tax rates on the financial performance of SMEs in Uganda; b) to investigate whether the nature of tax administration has an impact on the financial performance of SMEs in Uganda; and c) to explore the effect of other enterprise and business environment characteristics (like age, ICT (website use), access to finance, corruption, and competition, among others) on SME financial performance. The study hypothesizes that taxation (measured using subjective measures of tax rates and administration) negatively affects the financial performance of an SME. Overall, the results highlight a negative and statistically significant relationship between taxation and the financial performance of SMEs in Uganda. Specifically, the findings reveal a negative and statistically significant relationship between tax rates and the financial performance of SMEs. In addition, the results show that SMEs that reported tax administration as an obstacle experience a declined financial performance.